Poster child for anti-Wall Street sentiment says it could take years

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"There's fear in America," says Edward Liddy, who came out of retirement last September to run AIG for the government for $1 a year. "People are very concerned about their jobs, their homes, their pensions."

Edward M. Liddy, the would-be rescuer of American International Group who has become a target of wrath over Wall Street excesses and the ravages of the recession, knows all too well what is driving that anger. "There's fear in America," says Liddy, who came out of retirement last September to run AIG for the government for $1 a year. "People are very concerned about their jobs, their homes, their pensions."

And Liddy, who is no fan of the multimillion-dollar bonuses agreed to by his predecessors at AIG even while he tolerates them, knows very personally what such fear and want mean. Liddy, who earned more than $130 million over eight years leading Allstate until 2007, grew up so poor that he, his mother, and sister were thrown out of their homes at times after his father died when he was 12. There were days, he says, when food was short in his native New Brunswick, N.J. "We'd have dinner for three and food for two and my mother would say, 'I don't feel well right now. You two go ahead,' recalls Liddy, now 63. "You can believe I know the angst of the American taxpayer and what's happening in economically uncertain times."

But rage and fear, he says, should not blind people to the best way out of the AIG mess. In an exclusive interview with BusinessWeek, the reluctant AIG chief says he and others at the company want only to pay off the $80 billion that the government has poured into the company so far and help it make money on another $50 billion in investments the government has made in AIG-related operations.

The approaches AIG management is taking, even if they seem to only ramp up the furor, should do just that over time, he says. And Liddy says they should also leave surviving companies that will be able to keep many of AIG's 116,000 global workers employed and its policyholders protected.

Making that case has been enormously difficult for Liddy, a tough-minded executive whose professional climb has been a modern Horatio Alger tale. He worked his way through Catholic University and launched his career at Ford after collecting an MBA at George Washington University. He worked at pharmaceutical company G.D. Searle & Co. and later helped take Allstate out from under Sears, Roebuck and Co. He then led Allstate.

Liddy's tenure at AIG, since taking the helm at the request of former Treasury Secretary Hank Paulson, has been marked by public relations disasters that he didn't create. Only a few days after the federal government launched the bailout of AIG last September, top executives — not including Liddy — wined and dined independent agents at a posh California resort for a week, costing some $443,000. In more recent days, of course, disclosures about some $165 million in retention bonuses have drawn the ire of no less than President Barack Obama.

Liddy himself was skewered over the bonuses this week in a daylong hearing in which he was grilled by a couple dozen congresspeople. One, reflecting the public outcry, says AIG nowadays stands for "arrogance, incompetence, and greed." Says the chronically understated Liddy, "It was a very uncomfortable experience."

Many critics have said the brouhaha over bonuses and marketing meetings also reflects populist rage against Wall Street, anger at how the pinstriped set seems to be making out lavishly at public expense in a game that's rigged against the public. But, as Liddy sees it, it also reflects the huge cultural gap between doing business in the private sector and doing it publicly and in ways answerable to politicians and bureaucrats.

Take the marketing meetings. Such meetings, he says, are the way business is done in the insurance world. Companies such as AIG want independent agents to pitch their policies and other products instead of those of rivals, and bringing those agents to resorts to both school them in the products and reward them for selling them is just ordinary business practice. "Do you hold them in nice places? Yes, because you want people to come," he says. While they are there, he adds, the agents get hefty doses of education in so-called suitability, so they don't wind up selling risky long-term products — say variable annuities — to 85-year-old widows.

As for the bonuses, Liddy would have handled them differently. He says he would have offered less generous payments, made them contingent on performance, and included a "clawback" provision to take the money back if people left. But he says he inherited the contracts for the bonuses from his predecessors who arranged them as long ago as late 2007 and early 2008. He says he feels bound to honor the contracts, arguing that in insurance, in particular, a company is only as good as its ability to keep its promises.

He adds that the staffers who have collected the bonuses — more properly called retention payments — are needed, too, to wind down some $1.6 trillion worth of complex derivatives contracts so the company can exit that business without facing multimillion-dollar losses.

This, too, reflects the gap between Wall Street and Main Street, he suggests. On Wall Street, multimillion-dollar bonuses are the way people get paid, as they handle business that can cost a company far more if a trade is mismanaged. The people handling the derivatives contracts — whom he pointedly says are not the ones who got the company in trouble over them last fall, since those folks have been canned — have so far managed that business down from $2.7 trillion at the end of December.

"Those people don't want to work for free," he says. They must be paid well, he says, to stay on — especially since they are managing themselves out of work, in effect. The amount of money AIG can lose if they walk or people unfamiliar with the business take over is just too great, he argues. "You can lose 10 times the $165 million in a day on a bad trade, and that's just not a good risk in our judgment," he says.

Liddy's game plan to restructure AIG also has run into disastrously bad timing. He has refused to sell a well-regarded Asian subsidiary, AIA, for lowball offers. Though some critics argue that the attempt to sell the unit came too late and involved giving far too little information to prospective buyers, he insists there was plenty of detail and ample time. He himself tried to pitch it to Chinese investors, though they were scared off by the market meltdown in the U.S. The problem, he says, is that would-be buyers — big insurance companies, mainly — have seen a huge slide in their stocks, so they don't have the up to $25 billion to do a deal for the company.

Liddy is now planning to put AIA and another big subsidiary, Alico, into a trust and turn that over to the Federal Reserve. The move would take the units off AIG's balance sheet — though AIG would continue to run the companies — and reduce or eliminate AIG's debt to the Fed. Eventually, he says, the Fed could sell the trust or spin off the companies in a public offering. As for the rest of AIG, he expects to change the names of its many insurance companies and perhaps the parent, since the AIG name is so tarnished that customers might balk at it.

Liddy expects that the turnaround of AIG will take several years. Given what he has had to endure, he says he may not be around in the top job to finish the task. But he insists he will stay, despite all the grief and occasional threats he gets, until he positions the company on the road to recovery. "This is not a life job for me," he says, adding he'd much rather be promoting Chicago for the Olympics, helping hospitals back in the Chicago area, and enjoying his family. "I want to get it moving in the right direction."

The CEO took the position because former Treasury Secretary Paulson, a longtime friend, asked him to. He says he felt a need to give back to the country, since it has taken him from rags to riches. Pulling AIG out of trouble would be something good, he insists, for the nation. "The country needs a victory," he says.